Select Comfort Slides Despite Killer Earnings

Ever since Alcoa (NYSE:AA[1]) kicked things off earlier this month, third-quarter earnings have been all about expectations[2].

Today, Select Comfort (NASDAQ:SCSS[3]) is learning that the hard way.

Best known for its “Sleep Number” beds, Select Comfort posted an earnings report most companies would kill for — especially considering the dismal outlook for the quarter[4] heading into the season. Profits increased by nearly 50% and beat Wall Street handily.

SCSS made $26.2 million, or 46 cents per share, as opposed to $17.2 million, or 31 cents per share last year and the 40 cents per share analysts called for. That also made for the seventh straight quarter the company has increased earnings and beaten the Street.

Revenue posted a solid jump of 24%, climbing to $246.8 million — around $2 million more than analysts had forecast — making for 12 consecutive quarters of growth. And same-store sales? A whopping 21% pop.

Not satisfied? Don’t worry, there’s more. Select Comfort also raised its full-year outlook (more than most can say) and is predicting an adjusted EPS between $1.51 and $1.53. Again, analysts were only expecting something in the range of $1.41 to $1.47, which the company had forecast earlier.

Finally, for revenue, SCSS is expecting a total of $927.3 million — a 25% jump from last year’s $743.2 million and the cherry on top of a delicious earnings report … right?

Sorry, Select Comfort, not so fast. Shares were down as much as 10% by mid-morning because everyone apparently wanted more. For full-year revenue, analysts had their hearts set on guidance of $946.4 million, which would have made for a 27% gain year-over-year. Only 25% just ain’t gonna cut it — even though it’s still a nice climb from 11% growth in 2010 and 23% in 2011.

And as for those full-year earnings … just look at what Keith Hughes, an analyst at Suntrust Robinson Humphrey told Reuters[5]:

“Investors usually focus on guidance and it was very good guidance, but it was not significantly above expectations. The company had very high expectations, which they’ve met … but it’ll probably take a greater beat to drive the stock much higher than it is currently.”

This is where the idea of expectations gets pretty murky on Wall Street. Select Comfort did raise its earnings guidance to be above analyst expectations — 10 cents above in some cases. But Wall Street was really expecting the company to exceed those expectations, and when it didn’t, analysts and investors were still disappointed.

Being successful — and thus, having a high bar set for you — can indeed be a double-edged sword.

Of course, investors also have good reason to be extra-critical of a successful stock like Select Comfort, which has gained around 35% since January and almost 75% over the last 12 months. While jumping into a struggling stock that manages to limp over a low bar might be cheap, betting on SCSS is anything but that these days.

Even after today’s drop, the stock is still expensive compared to its competitors. It trades at around 16 times forward earnings and 23 times trailing, while Tempur-Pedic (NYSE:TPX[6]), which dropped around 3% in sympathy today, trades at around 10 for both. Mattress Firm (NASDAQ:MFRM[7]) is also slightly cheaper, with a forward P/E of 14.

So, despite some stellar numbers and an upped outlook, investors might be right in their decision to sleep on Select Comfort, considering its higher price tag. And those already in on the booming mattress-maker might be trying to sell at the top.

The slightest sign of a slowdown — and today’s was indeed slight — has become enough reason for them to take the money and run.

As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.

Endnotes:

AA: http://studio-5.financialcontent.com/investplace/quote?Symbol=AA

all about expectations: http://slant.investorplace.com/2012/10/alcoa-earnings-aa-stock-expectations/